Ron Wyden, Democratic Senator from Oregon and Chairman of the Senate Committee on Energy and Natural Resources, grilled oil market experts today on why US consumers are not benefiting from higher US oil production via lower gasoline prices at the pump. Those experts indicated that whether or not they are aware of it, US consumers may be benefiting more than they realize.
Wyden questioned why US consumers continue to pay high prices for gasoline despite a marked increase in US oil production.
“The US economy may be benefiting from declining US oil imports,” but “prices at the pump have remained consistently high”, said Wyden at a committee hearing today. “At the gasoline pump, it’s been pretty much business as usual.”
Wyden questioned why, if crude oil prices comprise 67% of the cost of a gallon of gasoline, the availability of cheaper, domestically produced crude oil – combined with flat or declining US gasoline demand – has not led to big price cuts. “Supply is up, demand is down, but prices at the pump are still stubbornly high, and sometimes are as volatile as the gas itself,” he said.
Wyden also cast doubt on the validity of assertions that gasoline prices are closely linked to oil prices. “My sense is that may no longer be necessarily the case.”
Beyond US Borders
Wyden’s questions focused on a seeming disconnect between US gasoline prices and regional and national oil supply dynamics. But panelists explained that global markets, rather than localized production gains, are the primary determinants of both crude and product prices.
“Crude oil is indisputably a global commodity,” said Jeff Hume, Vice Chairman for Strategic Growth Initiatives at Continental Resources.
“As with crude, refined product prices are heavily influenced by the international markets,” said Energy Information Administration head Adam Sieminski. “Virtually every group that I know of that’s ever studied product markets believes that product prices are being set in the global market.”
US oil supply additions have put downward pressure on global prices, said Sieminski. “Consumers are benefiting from the growth in domestic oil production,” he said. “Increases in oil production from any source around the world, including the US, tend to hold oil prices down.”
Sieminski reiterated previous statements that more US supply translates into more Opec spare capacity, and less upward pressure on global prices.
Senator Murkowski, Alaska Senator and ranking member of the committee, concurred. “Rising American production has restrained some of what we’re seeing in terms of prices at the pump,” she said.
More of the Same, or Worse
US production growth can only do so much to ease the financial burden on US consumers, said President of trade group the Petroleum Marketers Association of America Dan Gilligan. “Because Bakken and Eagle Ford oil shale developments are delivered to Cushing, Oklahoma, they put downward price pressure on the WTI [West Texas Intermediate] contract, but only have a modest impact on the world’s oil prices because the WTI crude oil is landlocked and doesn’t have an outlet to the world oil market.”
And consumers should not expect a return to sub-$3.00/gallon prices. “Motorists are understandably frustrated and squeezed,” said AAA Director of Federal Relations Chris Plaushin. But “the days of the national pump price below $3/gallon is likely a thing of the past”, he said.
This comes down, in large part, to expectations that crude oil prices will remain at or near current levels.
“We are in a world of $100 [per barrel] crude oil, and we do not expect a significant decrease this summer,” said Bill Klesse, Chief Executive of Valero, the world’s largest independent refiner. “The US remains a crude oil importer. Crude prices clearly reflect movements in the global marketplace, and prices that we pay must be high enough to attract those barrels to our market.”
And non-market factors, such as delays to infrastructure additions, and the high cost of compliance with mandates under the Renewable Fuel Standard, may push prices even higher.
The high and rising cost of RINs – Renewable Identification Numbers, used to track compliance with the RFS – are borne by refiners, and will ultimately be passed through to consumers, said Klesse. He estimated the cost of RINs this year to Valero at $750 million, even higher if RIN prices rise.
For more on RINs, see Beyond Petroleum, For Real This Time
And repeated delays to approval and construction of the Keystone XL crude pipeline from Canada may also negatively impact the efficient functioning of the US oil market, said Faisel Khan, Managing Director of Integrated Oil and Gas Research for Citigroup. “As more Canadian crude gets delivered to the coastal markets, it will enter the global market and the US could lose a dedicated supply source,” according to the bank.
“Regulatory hurdles such as the delay in Keystone XL and RIN costs add friction to the US market,” said Khan. “Industry is working around these issues, with a higher cost of doing business.”
For more on the Keystone XL pipeline, see:
President’s Speech Prompts Reassessment of Keystone XL Rejection Risk
Stephen Harper on Keystone XL: Would You Rather Get Your Oil From Canada or Venezuela?
